MONDAY MORNING RISK MONITOR: DOMESTIC OUTPERFORMANCE

Takeaway:Domestically-focused US Financials are outperforming their globally-focused peers, while Russian banking's risk profile continues to rise.

Relative Differences

The Russia/Ukraine/Crimea situation continues driving relative performance differences within the US Financials sector. Note the first callout below. The US global banks are underperforming while the domestically-focused institutions are outperforming, which is essentially the opposite of our preferred positioning. Meanwhile, Sberbank of Russia, which is essentially the Russian banking system, is seeing its CDS rise dramatically. Separately, the yield spread is compressed markedly last week.

If there is one silver lining domestically it is that commodity prices finally stopped going up, posting a 1% decline for the week. It's also worth mentioning that the US and EU interbank markets remain benign.

Key Points

* U.S. Financial CDS - Swaps widened for 21 out of 27 domestic financial institutions. It's interesting to note the divergence between the US global banks (+7 bps on average) relative to Wells Fargo (+2 bps). The unrest overseas is favoring domestically-focused institutions.

* European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.

* 2-10 Spread – Last week the 2-10 spread tightened to 231 bps, -11 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

1. U.S. Financial CDS - Swaps widened for 21 out of 27 domestic financial institutions. It's interesting to note the divergence between the US global banks (+7 bps on average) relative to Wells Fargo (+2 bps). The unrest overseas is favoring domestically-focused institutions.

Widened the least/ tightened the most WoW: UNM, TRV, AON

Widened the most WoW: BAC, AIG, MS

Tightened the most WoW: UNM, COF, MET

Widened the most MoM: MS, GS, ACE

2. European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.

3. Asian Financial CDS - Asian Financials swaps were wider across the board with the sole exception of Mizuho in Japan, which tightened 1 bp.

4. Sovereign CDS – Sovereign swaps mostly widened over last week. The two exceptions included the US, which tightened 1 bp and Spain, which tightened 5 bps.

9. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 14 bps.

11. Markit MCDX Index Monitor – Last week spreads widened 2 bps, ending the week at 75 bps versus 73 bps the prior week. The Markit MCDX is a measure of municipal credit default swaps. We believe this index is a useful indicator of pressure in state and local governments. Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 16-V1.

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